2001 was a challenging year for the nation’s retailers. While there were a few strong performers (such as Wal-Mart), most of the country’s merchants experienced weakened sales results and reduced profit margins as they struggled in a weakened economy. For many, a less than stellar holiday season in 2000 was followed by eight months of generally lackluster sales results. In particular, department stores and apparel chains (led by The Gap) performed poorly during this period – unable to entice an increasingly fickle consumer to part with dollars in their establishments. Although concerns about the economy (and the associated job layoffs and wage cutbacks) negatively impacted sales results, other factors such as changing dress codes (and thereby buying patterns), unfocused and misguided merchandise offerings and aggressive expansion activities also contributed to a weakening of sales bases and reduced profit margins. In this regard, those particularly vulnerable were and continue to be the cinema chains, department stores, and apparel retailers.
The events of September 11th further eroded the confidence of the consumer. Initially in response to this event, consumers halted most spending. Although spending picked-up in the weeks following this event, most of this activity focused on the discount chains (such as Wal-Mart and Target) as consumers sought to stretch their buying power. Alternatively, luxury retailers found most consumers disinterested in their high ticket items, which appeared frivolous in light of these events.
The Thanksgiving shopping weekend, which is viewed by many as a barometer for the health of the upcoming retail year, was active in 2001. Although positive, this traffic was partly in response to the deep discounts offered by many retailers which can negatively impact profit margins. If the offered discounts continue in the months to come, retailers will need to make up in volume what they will be losing in profits. For some, this may prove to be an impossibility.
For the nation’s department stores, the picture has been relatively bleak for more than a year. With a large portion of its sales base associated with merchandise categories (women’s and men’s apparel) that have been unable to generate gains in sales, plus the impact of competition from the discount and specialty chains, most have experienced disappointing results throughout the year. Currently, there is little to suggest that the performance of these chains should improve greatly in 2002. With weakened or declining sales, many department store chains may reduce expansion plans and close or sell underperforming units in the coming year. This activity may prove to be problematic for the owners of marginal shopping centers for which it may be difficult to attract alternative tenancy.
For the nation’s luxury retailers, problems are varied and numerous. Unlike many other retailers, this category of merchants has historically been relatively untouched by recessionary issues. However, over the past decade, these merchants have become less exclusive in their marketing. With a more diverse shopper base, they have faced a greater exposure to any weakening in the economic climate. Additionally, while sales for these chains increased along with an expanding stock market and the fortunes it created, the market’s recent plunge impacted this shopper base and their buying capacity. The terrorist attack of September 11th also contributed to a downward trend in spending by many shoppers who had the funds for such luxury items but chose to spend less. Moving forward, it would appear that the exclusivity of the luxury chains will not return to past levels and as such merchants will be more exposed to economic downturns. However, with new product lines, more distance between the events of September 11th and a focused expansion strategy, many of the luxury retailers should again perform relatively well in 2002.
The same may not be true for many of the nation’s cinema chains, for whom the future is not viewed as being clear or necessarily as positive. These retail chains have faced significant challenges over the past year and a half. With over-zealous expansion strategies and revenue that could not keep pace with this growth, bankruptcies have permeated the industry. The number of screens in the country increased by 56.5% between 1990 and 2000 but revenue failed to keep pace with this growth. With such a dramatic increase in the number of screens, many of the cinema chains experienced weakened profit margins and cash flow insufficient to cover the debt burden created by their expansion activities. As such, between August of 2000 and October of 2001, the majority of the nation’s cinema chains filed for bankruptcy protection. In response to the associated restructuring, it is now anticipated that 10 to 15% of the nation’s obsolete theaters will close by year-end 2001 and many more will follow in 2002. Currently, even the only major chain not in bankruptcy (AMC) has announced that it will be closing 300 underperforming units over the next four years. Although these closures may be of some concern to many shopping center owners, for the better centers, alternative uses (such as fitness centers and other big box outlet uses) are possible for this space - thereby mitigating the impact of the vacancy on a property’s sale levels or value. With these closures and improved financials resulting from bankruptcy settlements, many of the cinema chains may be more profitable. However, 2002 should remain a year of correction for this industry.
From an investment perspective, regional shopping centers and grocery-anchored neighborhood centers have generated the most interest within the marketplace over the past year. For the grocery-anchored neighborhood centers, interest is strongest in the mature trade areas which offer a measure of protection from competitive development. Unlike the larger power centers, that feature three or more big-box units, neighborhood centers have been less vulnerable to competition among "category killers". In 2002, with the economy assumed to remain in a weakened state, it is the power center tenants that are viewed as having the greatest level of vulnerability while the grocery tenants (which sell a needed commodity) are viewed as being somewhat insulated from risk. As noted, regional shopping centers of quality have remained a desired investment in the market place. However, most owners recognize the difficulty in obtaining such product once sold, and as such few of any quality have been offered for sale in the recent past. In 2002 and the years that follow, any center of quality should be purchased at attractive yield rates given the lack of equilibrium between the supply of and demand for such product. Centers with an entertainment focus should have diminished appeal to investors in 2002, as theaters and many restaurants continue to struggle with competitive issues and a weakened economy.
Although the level of consumer spending held up relatively well through most of 2001, increased unemployment may negatively impact certain markets throughout the country. With reduced levels of disposable income, sales at the centers within these areas may suffer. However, population growth and increased income levels are anticipated to be very strong over the next five years in a number of the nation’s metropolitan areas. Assuming the economic downturn is short in duration, it is possible these markets may not feel the full impact of the current economic challenge. In particular, we look positively to such metropolitan areas as Las Vegas, Austin, Phoenix, Atlanta, Raleigh-Durham, Orlando, West Palm Beach-Boca Raton, Denver, Dallas-Fort Worth, Charlotte and Portland. These areas have generated demographic strong growth in the recent past and should continue to have healthy increases in disposable income in the near future. This vision is shared by a number of the country’s developers, which have focused recent development activities in these areas. Between 2000 and 2002, twenty-eight regional shopping centers (with 32 million sq. ft.) have or will have opened. Included in this development are the following: Denver: FlatIron Crossing (8/00) and Colorado Mills (Fall ’02); Dallas: Stonebriar Centre (8/00) and The Shops at Willow Bend (8/01); Atlanta: The Mall at Stonecrest (10/01) and Discover Mills (11/02); Phoenix: Chandler Fashion Center (10/01) and Prescott Gateway (3/02); West Palm Beach: The Mall at Wellington Green (10/01) and City Place (10/00); Raleigh-Durham: Triangle Town Center (Summer ’02) and The Streets at Southpoint (3/02). Moving forward, other planned development in the cited growth markets include: Summerlin Town Center in Las Vegas (3/05), Mall at Newman Crossing in Atlanta (1/04) and another Simon Center in Austin.
Moving forward into 2002, rising unemployment coupled with a stagnant global economy and fear of continued episodes of terrorism should restrict sales gains. Still, the aggressive steps taken by the Federal Reserve in 2001 should help to stabilize prices and lift demand over the year.
Near term, the luxury retailers and jewelry chains may struggle. However it is the department stores and apparel specialty chains for which there is long term concern (both in 2002 and beyond). To this end, merchandising will need to be innovative while not losing touch with the consumer to which it is being marketed. Department store chains in particular will need to address the issues which are eroding their sales bases. Even so, in 2002 and in subsequent years we should see a further consolidation of this business.
Discount stores such as Wal-Mart have demonstrated in 2001 that they can compete effectively in a difficult market and this should not change in 2002. However, even in this retailing category, the weaker chains may be forced to undergo the closure of units (as is currently being undertaken by Ames and K Mart), as competition combined with a weakened economy impact both sales and profits.
Economic and competitive issues can give pause to expectations for the future and often doomsday forecasts for the retail industry or portions thereof. However, new retailing concepts can be good for the industry. Economic constraints often benefit the consumer and can result in more focused retailing. With the advent of big box retailing, it was concluded at that time that department stores and many of the traditional centers that housed them would be displaced by this new competition. While there were in fact casualties, most department store chains became better merchants and the larger regional shopping centers fine-tuned their focus. However, the increase in the country’s retail inventory was not only accommodated by improved marketing and product, but by a period of economic expansion that proved to be the longest in the nation’s history. Still, even economic prosperity cannot protect the retail chains or centers that are of substandard quality and it has been these entities that have generally been the casualties of retail expansion. This concept was again tested in the late 1990s when it was suggested that another form of retailing (in this case Internet shopping) would destroy the bricks-and-mortar retailers. However, it soon became clear that instead of putting shopping centers and retailers out of business, it was to become an auxiliary channel for conventional retailers to reach their customers.
Basic disciplines, such as prudent expansion strategies and focused merchandising, often result in successful retailing. However, success is also dependent on a healthy economy. It is our opinion that while the nation’s economy may weaken further during the first half of 2002, the overall outlook should not be as poor as has been suggested by some. However, with restricted economic growth, some merchants will struggle and there should be another wave of bankruptcy filings and store closures. Of particular concern are the future of a number of department stores and cinema chains. Many of the well-managed discount chains should continue to perform as consumers seek value. In addition, many of the better retail chains should weather this storm, and emerge as better merchants.
Special report produced for SCW by Deborah Jackson of Grubb & Ellis